2013 tax code cheat sheet

6 key tax changes to consider now

In January, Congress passed the American Taxpayer Relief Act of 2012 (ATRA). Many provisions in the fiscal-cliff legislation were stopgaps until Congress could wrangle its way through the budget — and might go away soon. (To see how that works, watch Spielberg’s Lincoln — or C-Span.) That said, several tax provisions became permanent parts of the law, and the Internal Revenue Service is rushing to write proposed procedures to implement the law — and to simplify your filing burdens.

Let’s look at some of the tax provisions that could impact your life this year, and some of the proposals you still have a say in. One person with rational suggestions can make a difference.

Use it or lose it

1. Non-Business Energy Credit (Form 5695). This credit, which used to be much higher in the early Obama years, was extended through 2013. For 2012 and 2013, you are entitled to a lifetime (2005-13) credit of up to $500 for home improvements (roofs, windows, insulation) that meet the definition and standards. Before filing your tax return, get paperwork from the contractor or equipment manufacturer to prove that your improvements are qualified for the credit. Read what happens when you don’t get the paperwork.

2. Cancellation of debt (COD) on personal residence. According to RealtyTrac, 1,836,634 homes were foreclosed in 2012. But these former homeowners will also be getting 1099-C forms, reporting that they were relieved of their mortgage debt. Generally, debt relief is taxable. Under the Mortgage Debt Relief Act of 2007, you can avoid the taxes if your mortgage is or was qualified acquisition debt (your original mortgage, or a refinance for no more than the original mortgage, or a loan used to pay for improvements to the home). The benefits of this law were extended to Dec. 31, 2013.

Seib & Wessel: Impasse looming over bBudget

(3:10)

The GOP may be willing to swallow deep spending cuts from the so-called sequester rather than raise taxes.

So if you’ve been thinking about getting out of a property whose mortgage is higher than the value, it’s time to stop procrastinating. It takes months to deal with short sales, deeds in lieu of foreclosure — or even foreclosure. You need to settle the title transfer and loan issue this year to avoid that great big COD bill.

Incidentally, if you are getting a 1099-C for cancelled credit-card debt or other kinds of debt, there may be another way to help avoid taxes on that income: the insolvency exclusion.

3. Qualified Small Business Stock (QSBS). Originally, the Small Business Jobs Act of 2010 allowed for 100% exclusion on certain profits from the sale of QSBS, if it was purchased after Sept. 27, 2010, and before Jan. 1, 2011. That means investors buying such stock in 2012 had to follow the old rules. You could only exclude 50% of the profits.

Good news: The American Taxpayer Relief Act of 2012 extends this 100% exclusion of the gain to Dec. 31, 2013. You can still go out and help support new start-ups, or fund your own. ATRA makes this law retroactive to Jan. 1, 2012. So QSBS stock you bought last year still gets this benefit.

Interesting twist — you may want to amend

4. Adoption Credit (Form 8839). This has become a permanent credit, though it is no longer refundable. That means you can only use it to reduce your tax liability — but can’t get cash back. (You can carry the unused credit to the following year.) Adoptions can be expensive. According to Adoption.com, the costs can run anywhere from $5,000 to $40,000, or more.

In the course of researching adoption credits for same-sex couples, an interesting fact came to light. The IRS FAQs say that each parent may claim a credit for the adoption expenses they paid. (See the 5th question.) What does that mean to you?

Robert Pernell / Shutterstock.com

Any couple who is considered unmarried under federal law is treated as two single people. When you adopt a child, you each get the full adoption benefits for your share of the expenses. That means, in 2013 each person is entitled to have their employer pay up to $12,970 worth of their adoption costs, as a tax-free benefit. (If the employer isn’t willing, you could ask to reduce your salary by that amount and have your employer pay the expenses for you.) In addition, you may claim an adoption credit of $12,970. Most people think that you can only take these two benefits once. That is true for married couples. But unmarried parents get to double dip: An unmarried couple is entitled to $25,940 worth of employee benefits, plus up to $25,940 in adoption credits for the same child. Naturally, you may only claim the expenses you or your employer actually paid.

If you were a same-sex couple or an unmarried couple who adopted a child together in 2010 or 2011, you may want to consider amending those two tax returns. Why? The adoption credit was refundable in 2010 ($13,170) and 2011 ($13,360). It’s just possible that you only used half the credits, thinking that only one of you could report that child’s adoption. William Perez at the About.com tax guide provides an excellent overview of the tax benefits of adoptions.

As Nina E. Olson, the National Taxpayer Advocate points out, the Internal Revenue Code has bulked out to about 4 million words. True, there is that annoying weight of the tome, and the difficulty in interpreting its provision. But, it’s filled with lots of little surprises, like that adoption credit trick.

Speak now or forever hold your peace

5. Office in home. Taking a tax deduction for having an office in your home is a red flag — that’s a big fear of small-business owners. On top of that, it requires a ton of documentation and you must depreciate your home. Which means, when you sell it, you will have to pay tax on the depreciation you’ve taken. What a pain. The IRS wants to save you some of that work – and the depreciation trap. They have proposed a deduction worth $5 per square foot of office space, up to $1,500 per year. This will take effect on your 2013 tax return (the current tax year). You have until April 15, 2013, to let the IRS know what you think about this – and if there’s a better way to handle the office-in-home deduction. Read the details here

6. Applicable Federal Rate (AFR). Families and friends often give each other interest-free loans. Then they come up against the IRS rules about charging a minimum interest rate. What if you don’t charge any interest, or at least the minimum percentage? The IRS taxes you on the interest income — even though you were never paid interest. That’s called “imputed interest.” The IRS is soliciting comments on how to establish that minimum rate, which changes each month. You have until April 26, 2013, to provide suggestions on how to improve the way this rate is determined. Read the details here

Eva Rosenberg is the publisher of TaxMama.com , where your tax questions are answered. She is the author of several books and ebooks, including “Small Business Taxes Made Easy.” She also teaches tax courses at IRSExams.com and CPELink.com.

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